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tv   Bloomberg Real Yield  Bloomberg  February 7, 2020 7:30pm-8:01pm EST

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jonathan: i am jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, a blowout payroll report delivering a big upside. junk issuers jump back in. china growth fields -- fears keeping a lid on treasuries. we begin with the big issue, another solid report. >> these numbers are impressive. >> there is a lot to like about this report. >> momentum is turning in the right direction. >> these employment gains are clearly above the underlying trend. >> definitely trending higher.
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>> the u.s. economy is in a good spot. >> the u.s. is clearly the bright spot in the world. >> we have to take into account what is happening in the rest of the world. >> it will be interesting to see if the effects of the coronavirus come to our shores. >> something like 70% of production is in china. we don't know when it comes back on. >> if china takes a hit. >> the markets may be range bound as we get through this. jonathan: joining me are the table is bob michele, priya misra and matthew hornbach. great jobs report with a big caveat. all of this data for the month of january predates the scare coming out of china. priya: the jobs report is actually not that important. it is always a backward looking indicator. we had this pretty big coronavirus shock. we don't know how long it will last.
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looking at the impact on china on the u.s. is much higher than it was with sars. the report told us the labor market was chugging along as of january. that does not mean a lot. that is why the treasury pretty -- treasury market pretty much ignored it. jonathan: treasury yields are down six basis points. 158 on a u.s. 10 year. it is as if the payroll support -- payrolls report never happened. matt: this reminds me a lot of 2014. u.s. economic data was outperforming almost the entire year. what happened to treasury yields? they went down, down, down. if you look at why that happened, it was because overseas investors bought a tremendous number of treasuries in 2014 because yields outside the u.s. were minuscule. it is the same thing. people are coming to the u.s. because you get high quality, high growth, high yield. jonathan: the u.s. economy can decouple from the rest of the world to some degree.
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the treasury market cannot. are we seeing that play out again? bob: absolutely. i was in europe last week. everywhere i go clients have too much cash. they are looking for reasons to get to the bond market. if they are in markets with negative yields, they are trying to find that thing in the u.s. that gets them to jump in. i think the market is doing the right thing today. the employment report is fun to look at, but pointless in the wake of the coronavirus. people are taking out a little protection against what could happen over the weekend. jonathan: talk to me about the range on the 10-year right now. what kind of range are you thinking about? bob: the fed does not want to change the fed funds rate. the 10-year will be in tagging distance of 150 to 175. in a risk-on environment, 175 to 190. in a risk off, maybe down to 150, 140.
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that is it for the first half of the year. priya: i completely agree with bob. the upside is a little more capped than the downside. can the 10-year get below 150? possibly. if the fed is starting to cut rates they can go a lot more. the upside, the fed told us we have your back if financial conditions tighten if the u.s. economy slows down. if it's ok, we will let it run. jonathan: the signal from the bond market, we believe you, you will keep rates low. you, generateve inflation. is that the signal you see? matt: the 10-year breakeven inflation rates cannot get out of bed. it's had good reason to try. we will have decent base effects pushing up the rate on your on your inflation into the first quarter of the year. the bond market does not seem to care. the one thing that stood out to me was the monetary policy report from the fed. they acknowledged the possible downside risk of the coronavirus. this is another element that will weigh on people's thinking when they decide what to do with their cash.
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treasuries is the safest place to be if the risk continues. jonathan: momentum has to matter. you look at the rest of europe and asia. the u.s. has positive forward momentum for january. december for the likes of germany, we are talking about recession risk in europe. it's a massive problem for the ecb. bob: people looked at the data out of germany this morning and it was horrific. it was to the crisis era levels. if you don't see yields going up and you are stuck in negative territory, you are coming into the u.s. market. there are a lot of other reasons yields are staying low in the u.s. the problems have not gone away. we see all the campaigning. we have the iowa caucus, the new hampshire primary. people are getting a little anxious about how all of this will play out in the general election. brexit has not gone away. what is a phase ii deal going to look like with china now that they are mired with coronavirus? jonathan: the debate of 2019 is
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not going away either. we have repeated it so many times it has almost got boring. manufacturing. services are resilient. we thought we would see manufacturing picking up. then we got punched in the face by a growth scare again. priya: there is probably still an assumption that manufacturing was weak because of the trade war. the fact we got a phase one trade deal, ok, manufacturing can start to move up. that is not happening in europe. that will largely stay weak. profit margins for the u.s. corporate sector has been declining for the last couple of years. it intensified. i'm concerned the profit margin story will weigh on the service sector. bob: can china deliver on its side of the phase one agreement? it does not look like they can. they shut down the country. priya: even if they can't deliver, does the president reinstate tariffs? highly unlikely.
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that doesn't mean the business uncertainty goes away. as you highlighted, the election. at what point does the corporate say they need to cut down on hiring? jonathan: not just about the outlook and the balance of risk, you think the hard data in the u.s. is about to rollover at some point this year? priya: yes. that's why we had the fed easing later this year as well. it could take a while. the labor market is still strong, but we are really concerned if there is no let up in uncertainty, no let up in the global growth drag, the u.s. corporate sector cannot do this alone. which is why it will ultimately spillover into consumption. matt: if that were the case, i would want to see it show up in measures of ceo confidence and small business optimism. we are not seeing that yet. these measures are bouncing.
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they are not back in the pre-u.s.-china trade conflict levels, but they are heading in that direction. they might not continue but i want to see those pivot lower again before i started to get more concerned about the u.s. economy. bob: we are funding their complacency. they are able to issue whatever they want in the corporate bond market at ridiculously low levels to service the debt. they are using that to buy back shares and raise dividends and maybe even buy each other. why wouldn't you be a happy ceo with that environment? jonathan: any policy initiatives on the horizon? this has been a really policy driven market for many years. are there any policy initiatives on the horizon you can see that changes the dynamic we are discussing around the table? from china, europe, the u.s., the fed? bob: i think central banks want to stay where they are. i think what changed the dynamics is seeing a fiscal impulse come out of somewhere. i don't see who has the courage, capability or ability to do that.
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matt: when i look around the world at the central banks that have been opining on policy and the risks around their outlooks since january 1, i can't find one central bank that wants to cut rates aggressively, nor a federal bank -- a central bank that was to talk and more hawkish tones. they just want us to believe they are on hold for the foreseeable future. that is what you don't get volatility in the market place. jonathan: do you believe them? yes. fx vol is at all-time lows on our metrics. jonathan: if you want to put capital to work, what do you do? is there an inflation call option you would like to take at the moment given no one is pricing in higher inflation? priya: you put on steepeners. the market is not pricing in the fed easing or inflation risk premium going higher. the fed will conclude the
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inflation premium by the middle of the year. they will push on the theme they will let the economy run hot. the u.s. treasuries are assuring 20-years. jonathan: do you like that trade? matt: we like another version of a steepening trade. it's because there is an asymmetry with respect to how worse things can get or things get better. if things can get better, the yield curve steepen a touch. if they get dramatically worse, we can see the front end of the curve bring the fed into play. we still have more of a risk off mentality in the recommendations we have for our investor base. we think there is more to go on the risk off. bob: i am all in. there is too much liquidity looking to get into the bond market. i want to get into emerging market debt. when the fear over coronavirus subsides, you have central banks that have capacity to bring yields down a lot. you have high real yields and fx that can kick in in a big way. jonathan: bob michele is all in.
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next, the auction block. that conversation is next. this is "bloomberg real yield." ♪
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♪ jonathan: i am jonathan ferro. i would like to head to the auction block and start things off right here in the united states. companies boosting deal sizes and weekly ip issuance. sales of high-yield debt heading for its second as week of the year with roughly $14 billion in bonds priced in multiple times over. in europe, closing the biggest corporate bond deal since 2016. 9.3 billion euros of bonds. two of the euros tranches placed
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at negative yields. headwinds to investing in high-yield. >> the credit markets today are challenging. a great call on triple c. i think you have to be tactical around that. you get in, you have got to get out of it. liquidity down the credit spectrum is really tough. we are all in, all-out, and you cannot trade that much. jonathan: back with us, bob michele, matthew hornbach and priya misra. bob, let's talk about the shift in high-yield. you are leaning into this? bob: yeah. i don't want to fight this. the middle of last year, it looked like we were heading towards recession. the central banks eased. we totaled 88 central bank rate cuts. 9000 basis points. you got compromise on trade. what is there to fight? i look at it from the perspective, you worry about high-yield. if you think you are going to lose money, you need default rates they go up and they go up when you have a recession.
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if the probability of recession is reduced so dramatically, why do i want to fight that? i will not have default rates, i will not lose money and i have got loads of clients looking to get into something that has a positive yield. jonathan: summer of last year this was a 180. you were worried. you were worried about the end of psychodynamics bleeding into fixed income, it did not happen. what was the inflection point for you? we need to lean into this and turn the other way? from thek and awer central banks. providing liquidity backdrop and expansion of the balance sheet again. that was the inflection point. a compromise on trade was a nice tail end. priya: the fed reaction point is critical here. the fed was highly divided when they cut rates, yet even the fed officials did not want to cut rates and are not talking about hiking now. the fed is behind this on hold easing, but the balance sheet is growing.
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i'm concerned about growth but not necessarily over the next few months. i think credit is ok for now but i would say hedging that liquidity risk might make sense. hedging the default risk in long treasuries. matt: you had two things happened last year that was shock and awe for me. one was the ecb. massive easing. if you look at what the ecb did, they had a tremendous about of impact on the market by flattening the bund curve. they cut 75 basis points, but they told us once the uncertainty went away they were not going to take the 75 basis points back from us. that is a gift. to me that explained the risk on in the fourth quarter much more so than the balance sheet expansion. jonathan: you talked about the asymmetric risk. tilted more toward rate cuts than rate hikes. that is the additional layer on top.
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matt: when i look at what is priced into the front end the curve, we have about 1.5 rate cuts in the price for this year. that does not stand out to me as being egregious. i can see that going to three rate cuts this year if things really deteriorate. that is not what i'm expecting but it can happen. jonathan: from the credit perspective, let's talk about the price. we are rich. we could have said that over the last four years for sure. they issued debt with negative yields, is that something you want to be on the other side of? bob: i think you are looking at tired, old, antiquated metrics of default, risk premium, yields, credit spreads. there is a new world. if you're not going to lose money and you have abundant liquidity, yield points and credit spreads are just math. it will come in and flood the market. do i want to be dogmatic and academic and fight it?
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or do i want to invest with it until something changes? the thing that has to change is the probability of losing money. as matt said, the central banks are underwriting this. that 75 basis point in cuts led to a huge mortgage refi. consumers are spending that money. you have a very stable environment. jonathan: let's take tesla. the 2025 note. it has come up on the program so many times. that yield when it was first issued, everybody knows the story. record low yield. the yield on that now is 480. 4.8%. on triple c credit. right now in the united states. that has upgrade potential, i understand. there's a big equity at the moment. we have the cash flow story that is improved. all those things in this credit's favor. are we saying tesla 2025, is that when you can yield on five-year money from a triple c credit?
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bob: i think tesla is a phenomenal one-off story where the stock quadrupled in price. that is like looking at government debt to gdp at 100% and somehow gdp quadrupled. the debt has not changed but now it is only 25%. i think that is some of the dynamic that is going on. it's an interesting company. there is a lot of moving belts. they only have one outstanding fixed rate bond. if people want to buy, go ahead. jonathan: the majority of the profile has been the convertibles as well. it is all in its favor. the traditional metrics, if they don't matter anymore, how do you assign a valuation? bob: it's overwhelmed by the liquidity. that is the metric you have to weigh in. you have to be willing to write that. i was telling a story earlier, they come to me in say i don't
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debt, i will put money in your income fund. it puts it out into the different sectors. you can't fight that dynamic. if you're not going to lose money, why would you? priya: it is a global market as well. the liquidity bob was talking about is a global issue. bunds at -40 basis points. 10 year germany at zero. how much of that is coming into the u.s.? there is a global amount of liquidity, it will take real rates much lower. i think the fact the entire selloff over the last week was all driven by real risk, that tells you why the payroll report did not matter. it doesn't make sense in this global liquidity environment. jonathan: sticking with us. coming up, still ahead, the final spread. the week ahead, featuring jay powell's semiannual testimony to congress. this is "bloomberg real yield." ♪
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♪ jonathan: i am jonathan ferro. time for the final spread. in the next week, a slew of fed speak including jay powell, his testimony to congress. cpi data coming out of china. and u.s. retail sales to close out the week. bob michele, priya misra, matthew hornbach back with us. let's talk about the testimony from jay powell. the review of monetary policy for the fed and the ecb. what are you looking for? bob: inflation targeting. are they moving off the 2% target? are they going to arrange? -- a range? that is phenomenally what i want to see. priya: i would agree. the fed has said they would not move their inflation target, but they are talking about range or
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how much will they let the economy run hot? what are the new tools? are they going to be effectively easier when the economy is hot? i think we will be looking for some details. i'm not sure about the reaction to the details because they are not done with it at the middle the year. matt: number one, i'm curious to see what they would do with the dot plot. it is an important forward guidance device. also, some inkling of a plan for what they will do when they get back to the zero lower bound. what will the next round of qe look like. will it be a yield curve control type program? are they giving up their balance sheet control to the marketplace or something less aggressive? jonathan: the former on whether they will shift things away for the inflation targeting. is there any scope of surprise given the fact there is plenty of evidence that the review goes on and a lot of this is bleeding into the reaction function and the decision-making at the fed already?
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matt: the scope for surprise is probably low. we don't expect them to do anything that binds their hands to a certain policy task. it's all about language. language matters. it is part of their forward guidance strategy, using language. the language will be key. jonathan: we will do the rapidfire around. -- round. we begin with 10-year yield in united states. 1.6% on the u.s. 10-year right now. what do we hit first? 140 or 180? priya: 140. bob: 180. matt: 140. jonathan: high yield, spreads around 350 basis points on u.s. high-yield spreads. are we tighter or wider? by year-end? matt: tighter. bob: wider.
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priya: wider. jonathan: interesting. fed cuts this year, 3, 2, 1, or none? priya: two. matt: none. bob: one at year end. jonathan: great to catch up with you all. bob michele, priya misra, matthew hornbach. thank you. that does it for us. we will see you next friday at 1:00 p.m. new york time. this was "bloomberg real yield." this is bloomberg tv. ♪
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yousef: the major stories driving headlines this week. manus: the coronavirus crisis worsens. after a markets plunge return from extended holiday. yousef: opec plus convenes an emergency meeting but the saudi push for an output cut runs into russian resistance. manus: a ceo thinks the response to the virus has been overblown as airlines feel the pain. ♪ yousef: the c

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